Inflation taking toll on nest egg accounts

Inflation taking toll on nest egg accounts

Although the consumer price index (CPI), the government's favoured inflation measure, fell from 3.1% in December to 3% in January, few savings accounts pay enough interest to enable a tax-paying saver to even match inflation at this level - a basic rate taxpayer would need to earn 3.75% and a higher rate one 5%.

Andrew Hagger of comparison site moneynet.co.uk said: "Although a limited number of best-buy products let basic-rate taxpayers achieve a positive return on their savings in real terms, they are in the minority."

He said the average rate on variable-rate savings accounts (assuming a £500 balance) is exactly 1%, while the average for a cash Isa with a £3,600 balance is 1.63%, meaning most savers see their money eroded over time. A cash Isa needs to pay interest at more than 3% to beat inflation, as interest is paid tax free.

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The best rates on taxable savings accounts are on fixed-rate bonds. ICICI's one-year bond pays 3.9% and requires a minimum £1,000. The Indian bank comes under the Financial Services Compensation Scheme, which guarantees savings of up to £50,000. Derbyshire and Cheshire building societies are paying 3.75% and require a minimum of £5,000 for their one-year bonds.

The choice is greater for cash Isas paying more than 3%, though most exceed the inflation rate by a small margin. Dunfermline building society pays 3.75% fixed until 2011, with a minimum deposit of £100, while Norwich & Peterborough building society pays 3.3% for one year (the full £3,600 allowance must be deposited). Nationwide also pays 3.3% for one year, with an opening balance of £1.

Those wanting to save frequently should look into regular savers' cash Isas. Saffron building society's regular saver Isa pays 7% fixed on deposits between £25 and £300 per month. However, Hagger said: "If you miss a payment your account will automatically switch to an easy-access Isa which presently pays 0.85%."

First Direct is paying 7% fixed for 12 months on its regular saver Isa on payments of between £25 and £300. But the Isa is only available to those with a 1st current account, which comes with a £1,500 monthly funding requirement, and no partial withdrawals are allowed in the first 12 months. If you need to close the account to access your money you will only be paid First Direct's cash e-Isa rate, currently 1.24% gross.